Pakistan may save $1bn if Russia agrees to cut crude rates

KARACHI: Pakistan may save around $1 billion annually on import of energy products if Russia agrees to supply discounted crude and oil products to Pakistan, research report of a brokerage house said on Tuesday.

Russia has agreed to supply crude, petrol and diesel to Pakistan on discounted price as per the petroleum minister’s announcement. There was also a possibility that LNG would be available to Pakistan in future, which could cater the rising gas demand in the country.

The deal would on a government to government basis; however, the modalities including product specifications and pricing would be finalised in January 2023.

“This will be a better deal for Pakistan as discount on both crude and oil products will not only reduce Pakistan’s energy bill but also affect local product prices,” believed Farhman Mahmood, head of research at Sherman Securities.

Though it is premature to comment about the pricing as it relies on geopolitics and product specifications, Russia produces several different types of crude oil, but its main export blend is Urals, which is a medium sour crude, the report said. It also exports large volumes of ESPO blend crude to Asia while other grades include Siberian light, Sokol, Sakhalin blend, Arctic oil and Novy Port.

Based on recent price cap on Russia’s seaborne crude oil at $60/barrel imposed by G7 which is supported by the European Union, Pakistan might be eyeing for FOB price range of $55-60/barrel, which would be at a discount of 35 percent from Saudi Arabian Light crude oil price of $86/barrel.

Pakistan mainly imports Saudi Arabian Light crude while the country’s crude oil import bill is expected to swell to $4.5 billion during FY23.

However, considering higher freight charges from Russia compared to the Middle Eastern region, the report hoped that Russian crude oil would be available to Pakistan at an effective price discount of 20 percent as freight cost would be almost double.

If that happens, the report indicated that Pakistan’s import bill might reduce by $300-400 million on an annualised basis, assuming local refineries process 30 percent of their crude from Russia and the crude oil is 20 percent cheaper than prevalent rates.

As far as import of refined oil products was concerned, UAE and Kuwait remained the major trading partners. Due to non-availability of products amid Russia-Ukraine war and limited global refining capacity, prices of refined products, particularly diesel was at a higher premium to crude oil price.

Currently, imported price of petrol and diesel is roughly around $98/barrel and $123/barrel - at a premium of $3 and $30 per barrel premium on crude oil, respectively. Thus Pakistan will be interested to get petrol and diesel in a price range of $60 and $85 per barrel, respectively. If that happens, product cost would be 15 percent cheaper than existing refined product prices adjusted for higher freight costs, the report said.

At current prices, Pakistan’s refined oil product import bill would be roughly around $9.5 billion in FY23. At prevalent oil prices, Pakistan might save around $400-550 million annually on refined products if the country was able to divert 30 percent of the refined purchases from Russia.

Thus, Pakistan might save around $1 billion annually or 6 percent of the total energy bill of $18 billion expected in FY23 if Russia agrees to supply discounted crude and oil products to Isalamabad.